The outlook for the Scottish and UK economies has weakened, with growth now expected to remain sluggish through the rest of 2025.
In its latest quarterly Economic Commentary, the Institute has downgraded its forecasts for Scottish economic growth to 0.8% in 2025 and 1% in 2026.
This comes despite more upbeat projections from both the Scottish Fiscal Commission (SFC) and the Office for Budget Responsibility (OBR), which have recently upgraded their expectations for 2026 whilst similarly revising down their GDP forecasts for 2025.
Economic growth is now slowing compared to the start of the year and inflation has also edged up to 3.4%, after staying below 3% throughout 2024.
The business environment is also showing signs of strain, with companies reporting cutting back on activities in the first quarter compared to last year, plagued by rises in National Insurance Contributions, which took effect in April, alongside uncertainty surrounding President Trump’s trade tariffs. Indeed, pay growth and employee numbers are down, signalling potential weaknesses in the labour market.
The current state of the economy was not unexpected: Institute Director Professor Mairi Spowage warned of turbulent and uncertain conditions which could last throughout the year in the previous commentary.
Professor Spowage said: “After a strong start to the year, the Scottish economy has faltered in March and April and is essentially the same size in real terms as it was six months ago.
“Unfortunately, the wider business environment and global events are still taking a toll on businesses and consumers, which is having a dampening effect on spending and business investment.”
In addition to the latest economic analysis, the commentary provides an overview of Universal Credit and Legacy Benefits in Scotland, a key element of the nation’s social security system, and summarises key takeaways from June’s spending review and medium-term financial strategy.
Dr Joao Sousa, Deputy Director of the Institute, said: “The fiscal announcements by both governments suggest that there are significant economic challenges in the years and months to come for the UK and Scottish Governments.
“Particularly from 2027-28 onwards, the choices of Government look to become more difficult. Of course, this is the role of the Government in power: but the difficulties of the UK Government this week show that events can quickly derail its plans.”
Read more here.
Authors
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.
Hannah is a Fellow at the Fraser of Allander Institute. She specialises in applied social policy analysis with a focus on social security, poverty and inequality, labour supply, and immigration.
João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.
Aidan is a Knowledge Exchange Assistant at the Fraser of Allander Institute.